IRS Form 990, which enables charities to share critical information about their organizations, is the key source of detail on a nonprofit’s governance, operations, and programs available to government regulators, the press, and the public.
In 2008, the IRS introduced new schedules and reporting requirements and thresholds as part of its redesigned Form 990, “Return of Organization Exempt From Income Tax." On September 7, 2011 the IRS released final regulations (T.D. 9549) to conform the Treasury regulations to the redesigned Form 990.
Effective as of Sept. 8, 2011, the final rules generally apply to tax years beginning on or after Jan. 1, 2008. They:
- Adopt with some modifications the temporary and proposed rules the IRS issued in September 2008.
- Update the regulations to allow for the new threshold amounts for reporting compensation
- Require that compensation be reported on a calendar-year basis.
In addition, the final rules address several key areas:
The final regulations eliminate the advance ruling process for new organizations. Now, an organization will qualify as a publicly supported organization (a public charity) in its first five years if it can show that it “reasonably expects” to receive the requisite level of public support during that period.
In addition, the new rules changed the rolling public support computation period from the four years prior to the taxable year being tested to a five-year period ending with the taxable year being tested. (Charities that fail the public support test are classified as private foundations.)
To pass the public support test a charity must receive more than one-third of its support each tax year from qualifying gifts, grants, contributions or membership fees, or gross receipts from activities that are not an unrelated trade or business. In the past, organizations unable to meet this standard in one tax year could be reclassified as a private foundation as of the first day of the next succeeding tax year if they also failed the test in that succeeding year.
Under the new rules, charities that fail to meet the public support test for two consecutive tax years will be treated as a private foundation as of the beginning of the second year of such failure, but only for purposes of sections 507 (termination of private foundation status), 4940 (excise tax on investment income) and 6033 (organizations required to file.) For other purposes, such an organization will be treated as a private foundation as of the first day of the third consecutive tax year.
Under the final regulations, a charity must now use the same accounting method for computing public support that it to keep its books and report on Form 990. In the past, nonprofits were required to use the cash method when computing public support and reporting on Schedule A, Public Charity Status and Public Support.
Reliance by Grantors or Contributors
The final regulations restore language inadvertently omitted from the proposed regulations allowing grantors and donors a limited ability to rely on a written statement by the grantee organization ensuring that such grant or contribution will not result in the loss of the organization’s classification as a publicly supported organization. In addition, for purposes of section 4966 (excise tax on a sponsoring organization of a donor-advised fund), sponsoring organizations may now rely on an IRS determination letter or ruling concerning the grantee organization’s public charity status to the same extent as other grantors and contributors.
If you have any questions regarding the impact the final regulations may have on your organization, contact your local CBIZ and Mayer Hoffmann McCann P.C. office.
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